Since the financial crisis of 2007–2009, the banking industry has been facing quite a few challenges – increased compliance and regulation requirements, low-interest rates, and low credit growth. Along with these threats, there have been major changes in recent years. Financial technology (fintech) has caused digital disruptions in the banking industry. This digital disruption has potentially improved efficiency with innovation and created a more competitive financial system that augments financial inclusion.
P2P Lending Platforms: A Fintech Innovation
P2P lending platforms directly connect lenders with borrowers. Some P2P lending platforms allow the lenders to choose the borrowers, while others allow their members to contribute every month and conduct online auctions for members to claim the total fund amount. AI-based chit fund platforms (a version of P2P lending that raises funds from a large pool of investors through an online platform) are becoming increasingly popular across the world.
Pros of P2P Lending
P2P lending platforms offer more convenience to their investors and borrowers. The benefits are as follows:
- Bigger Return on Investment Than Bank Savings Account
P2P lending platforms can beat the inflation rate and also provide a good return on investment. Most people invest in stock and shares but investing in P2P lets the investors further diversify their investments. Most P2P platforms offer an ROI ranging from 3%-8% per annum, but an AI-based chit fund platform can easily generate an average return rate of 12.5% to 25% per annum.
- Easy to Set-Up
Most P2P platforms offer a simple online registration process, which can be done any time from the comfort of your home
- Quick Loan Decisions
P2P platforms assess the risk profile of the borrowers more effectively, overcoming the information asymmetries of the banking business with the help of big data. This enables these financial entities to approve loans immediately. Moreover, the information on the candidate acts as a substitute for collateral. Hence, most P2P lending platforms offer unsecured loans to people and businesses.
- Reduce the Need for Human Interventions
Since customers can do most of their banking processes on their mobile apps, the need for personnel (tellers, customer service executives and loan officers) and for an extended branch network is reduced.
- Borrowing is Cheap
P2P lending platforms rely on online technology and hence operate at relatively inexpensive costs. The savings are shared with investors (reduced fee structures) and borrowers (low interest rates).
- Financial Inclusion
P2P lending platforms increase financial inclusion by opening the door to financial services for a segment of people that were underserved and unserved by traditional banks.
- Higher Innovating Capacity
P2P lending platforms do not have any legacy technologies to deal with. These new technologies help them create a culture of efficient operational design with higher innovating capacity than traditional entities.
Cons of P2P Lending
Although P2P lending benefits both borrowers and lenders alike, they come with their own risks as follows:
- Risk of Losing Money
Most borrowers use P2P platforms due to their low credit score, which makes it impossible for them to get traditional loans at a good interest rate. This opens the risk of default. There is a chance that borrowers with low credit scores might not pay you back in time or worse is the fear of money not coming back to you at all. Therefore, when you are choosing a P2P lending platform to invest, or to borrow, make sure you do thorough research on the reputation of the company.
- You Tend to Borrow More Than You Can Afford
Since peer-to-peer loans are easy to get without much paperwork, you are likely to borrow more than you can afford, putting your financial security at stake.
- Loan Limit May Not Be Sufficient
You may need the loan for purchasing a property or covering your expenses. But, some P2P lenders only allow a fixed loan limit, which may not be enough for its intended purpose. You may have to find other ways to compensate for the shortfall.
The Bottom Line.
The benefits of P2P lending platforms are clear, but they come with a few risks. If you’re considering a P2P lending platform for borrowing or for investment, always do your due diligence.
Aatish Khanna works with the Content Marketing team at Money Club – a digital chit fund platform that makes saving, borrowing, and investing your money more efficiently. He writes on topics to help his readers understand processes so they can make better financial decisions. He’s the go-to person that his family, friends, and colleagues turn to for all their money matters. He loves to play board games and aspires to one day build his one finance-related board game and app.